Education Savings Accounts Are Getting Another Look

During his second term, President Clinton twice vetoed tax bills
that would have allowed parents to set aside money in tax-free savings
accounts to help pay the costs of public or private schooling.

Critics said the idea would lead
down a "slippery slope" to publicly funded vouchers. Supporters said it
would simply provide an incentive to help families invest in their
children's education.

But with a new president who backs the idea, many observers predict
that legislation expanding education savings accounts is now on track
to become law.

"I sure think this bill's day has come," said Joe McTighe, the
executive director of the Council for American Private Education, a
Germantown, Md.-based group that supports the legislation.

And it's not just supporters who feel that way.

"The only thing that prevented this from [becoming] law was the
president's veto," said David A. Griffith, a spokesman for the National
Association of State Boards of Education, which opposes the measure.
"Now they've got a president who looks very favorably on this ... and
the votes are still there."

In fact, the Senate Finance Committee took the first step last month
when it approved a tax bill that contained the savings-account
measure.

Current law allows families to place up to $500 annually in after-
tax dollars into an education savings account, or ESA, to help with
higher education costs, with no tax on the interest. The proposed
legislation would raise the ceiling to $2,000, and allow families for
the first time to contribute money for K-12 expenses, such as tuition
at private or out-of- district public schools, after-school tutoring,
books, or computers.

It also would allow third parties, such as relatives or employers,
to put money into tax-free accounts for the same purpose.

"My goal is to increase options for parents, and I think this does
that," said Sen. Tim Hutchinson, R-Ark., who is co-sponsoring
savings-account legislation this year with Sen. Robert G. Torricelli,
D-N.J. "[It provides] more resources and more choices to them."

Sen. Hutchinson predicted that such accounts would spark an infusion
of money into education. He is especially excited, he said, about the
provision that would allow third parties to contribute. "That's a
potential floodgate," he said.

The Hutchinson-Torricelli proposal is called the Coverdell Education
Savings Accounts Act, in honor of the late Sen. Paul Coverdell, R-Ga.,
who was the leading Republican champion of the idea until his death
last summer.

Opponents, however, argue that the measure would wrongly divert
federal tax revenues to private and religious schools.

"Rather than fund K-12 ESAs, we urge you to invest needed resources
in our public schools," a coalition of education and related groups,
including the National PTA and the two national teachers' unions, the
American Federation of Teachers and the National Education Association,
wrote in a March 13 letter to the Senate Finance Committee. They
contend that the plan would disproportionately benefit wealthy families
with extra money to invest, and that the overall financial benefit
would be minimal even for those families.

But their concerns did not prevail, as language based on the bill
from Sens. Hutchinson and Torricelli was approved by the Finance
Committee the same day as part of a package of education-related tax
measures.

The bill, as introduced in committee, already contained the $2,000
ceiling, and Sen. Torricelli sponsored an amendment allowing the
accounts to also be used for K-12 education. His amendment was approved
12-8, with two other Democrats joining Mr. Torricelli in support; Sen.
James M. Jeffords, R-Vt., joined other committee Democrats, including
Democratic Leader Tom Daschle of South Dakota, in opposing
it.

A 'Sleeper Issue'

While education and tax policy have been the focus of considerable
attention in Washington this year—with President Bush unveiling a
$1.6 trillion tax cut over 10 years and a broad plan to overhaul the
federal role in schools—ESAs have generated little notice so
far.

"This is kind of a sleeper issue, relatively speaking," said Michael
D. Bowman, the vice president for government relations for the Family
Research Council, a Washington advocacy group that supports expanded
ESAs.

President Bush's education plan, unveiled just days after he took
office in January, emphasizes demanding more accountability from states
and school districts in return for greater flexibility. He also has
proposed providing educational vouchers to students in persistently
failing public schools.("Democrats, GOP Agree in Principle on
Federal Role," Jan. 31, 2001.)

His plan makes just a brief reference—one sentence in a
28-page document—to ESAS. That said, Mr. Bush proposes to make
the tax benefit much more generous, raising the ceiling tenfold to
$5,000.

Yet even some supporters say that such savings accounts alone would
have a limited impact.

"It's clear it's not going to help all families," Mr. Bowman said.
"It's something to be pleased about, but I'm not sure it's something to
be excited about."

"This is just one of a menu of ways to help parents finance school
choice," said Chester E. Finn Jr., the president of the Thomas B.
Fordham Foundation and a former assistant education secretary in the
Reagan administration. "The big drawback is ... that [the] accounts are
only useful to people with enough income to set aside the money."

A recent analysis by the nonpartisan Congressional Research Service,
which sought in part to examine the potential benefits, concluded that
"education savings accounts would largely benefit families that have
the wherewithal to save. Most would be middle income."

The CRS report estimates that for a married couple earning up to
$45,200, the family would generally save about $15 each year on $100 of
account earnings—which assumes a 5 percent interest rate on
$2,000. Those in the next-highest tax bracket would save $28 on the
same amount of earnings. The report notes that if a family's income was
too low to have any tax liability, it would receive no benefit from the
plan, though contributions for that family's children could come from a
third party.

The legislation has an income cap for participation. Individuals
earning more than $95,000 and couples earning more than $190,000 could
not set up accounts.

Given what they view as such limited benefits, opponents suggest
that the legislation's cost in lost tax revenue could be used much more
effectively if spent on other education initiatives.

"The budget is a finite entity," said Dan Maffei, a spokesman for
Democrats on the House Ways and Means Committee. "Do you choose to have
ESAs, as opposed to something else you could do with the same resources
to help the public schools?"

While the prospects appear strong that education savings accounts
will become law this year, even some of the most ardent supporters
offer a cautionary note.

"I'm very optimistic," Sen. Hutchinson said. "But there's going to
be an awful lot of competition for all the tax relief funds. There's a
long way to go."

Ground Rules for Posting
We encourage lively debate, but please be respectful of others. Profanity and personal attacks are prohibited. By commenting, you are agreeing to abide by our user agreement.
All comments are public.